Avoid taking the easy funding options when things get hard

Farm incomes are being hit and profits squeezed by the drop in farm gate prices. It’s leading to cash-flow problems for many farmers. While quick, short-term alternatives for finance sometimes look the easiest option to help struggling farmers out of cash shortages, we caution that these are often expensive and can be damaging.

The farm profits squeeze is being reflected in the level of borrowing by farm business and being seen in farm sales reports. A record £17.8 billion was borrowed by farmers in 2015 – an increase of 8.4% from 2014. In their 2015 UK Agricultural Land market survey , Savills highlighted debt as a significant issue for farmers. They report that 30% of farmers selling land in 2015 cited debt related reasons as the primary reason for selling.

Industry union leaders, supported by Defra, are pushing the European Investment Bank (EIB) for more support for the UK agricultural industry to help farmers restructure farm borrowing, ease cash-flow problems and to support a wider investment in the sector. But any positive outcomes seem some distance away.

Banks will lend if the proposal is strong and well-prepared

At the farm level, we are seeing banks are putting some sectors under more scrutiny than others, but they are still willing to lend to those farms that are well-managed and have a strong lending proposal. With continuing robust land values (although falling in the first quarter of 2016) the banks are still comfortable that the value of the land they take as security outweighs their lending risk.

We are pleased to say that all banks and lenders are responsible and will not knowingly lend their clients into difficulties – but we have seen cases where banks can get it wrong. Presenting a lending application in the correct manner will offer the bank a clearer sight of the business plans, will save the bank time in approving a proposal and may result in them offering the funding needed. Our Welsh farm livestock case study is an example of this.

Banks may be willing to extend or alter current lending arrangements, but bank staff are often busy and perhaps don’t have the time to nurse businesses through difficult times. Banks welcome a third independent party to help them and their customers navigate through delicate situations.

The simplest and most readily available option will not necessarily be the best

However, with incomes taking a dive it is more challenging for businesses that already have a high level of borrowing to get finance or the day-to-day cash they need to survive.

For many it is tempting to take the easiest and quickest route to finance to help them through a tough period. There are short or medium term alternative funding sources but they will be charging high rates and looking for a good return. Borrowing in this way is pouring more fuel onto the fire. While it may seem the simplest solution to offer temporary relief, it’s not necessarily affordable in the long term or best for the longevity of the business.

Borrowing to repay borrowing creates a continual downward spiral. The farming and business communities are littered with casualties that could have been avoided by careful negotiation of existing lending facilities or a planned strategic exit without any unnecessary erosion of capital.

Take professional advice and act quickly

Often businesses need to act quickly before the situation deteriorates. But before you take the quickest and easiest option, take independent professional advice. With the correct help and by planning and structuring your finance correctly, you may find an appropriate finance partner who understands your objectives and who will be willing to support you and your business for the long-term.

We’ve dealt with many strong businesses experiencing difficulties and often they just need extra support to help them through a tough period. We can help you communicate with your existing bank, reposition your plans in a way that is right for lenders, negotiate exit terms if need be, and give you access to appropriate alternative finance if you need a bit of time and breathing space. Please don’t hesitate to contact us, we’d love to help you and support farm and rural businesses to get the appropriate finance they need to prosper in the long term.